Encounters between legal
systems: recent cases
concerning Islamic
commercial law in secular
courts
by Nicholas H D Foster
The revival of interest in Islamic law prompts a number of questions, including
its suitability for the modern commercial world, and the appropriateness of
western-style courts for enforcement of the sharia.
INTRODUCTION
I
n recent years there has been a revival of interest in
Islamic law or, to be more accurate, the two distinct,
but overlapping, concepts of sharia and fiqh. The sharia
(stress on the second syllable, to rhyme with “Korea”
rather than with “carrier”) has a much wider ambit than
the Western concept of “law”. It governs “the Muslim’s
way of life in literally every detail, from political
government to the sale of real property, from hunting to
the etiquette of dining, from sexual relations to worship
and prayer” (Hallaq, W B (2003) “‘Muslim Rage’ and
Islamic Law” (54) Hastings Law Journal 1705, p 1707). The
literal meaning of fiqh is “understanding.” It is often
translated as “Islamic jurisprudence”, and has been
described as “the scholarship of rule-making” (Khalafallah,
H (2001) “The Elusive ‘Islamic Law’: Rethinking the
Focus of Modern Scholarship” (12) Islam and Christian
Muslim Relations 143, p 144). Manifestations of the revival
include the development of Islamic finance and the
enactment of “Islamic” statutes in Muslim-majority
jurisdictions.
This article considers an intriguing consequence of the
revival, the encounter of the sharia with Western-style legal
systems in some recent cases.
THE ENCOUNTERS
2
Contemporary legal systems, whether in Muslimmajority jurisdictions or in the West, are nearly all statebased for, as a result of “modernisation”, most Islamic legal
systems of the classical era were dismantled and replaced
Amicus Curiae Issue 68 November/December 2006
by European regimes (Hallaq, “ ‘Muslim Rage’ ” pp
1711–14). This is true even of Gulf states, the regimes of
which are based, to a greater or lesser degree, on the
sharia. So whether one attempts to follow the principles of
the sharia in one’s financial dealings within a Western law
context, or one attempts to incorporate rules based on the
sharia into a state-based legal system, Western and Islamic
legal mindsets come into contact.
In the last few years we have seen intriguing examples of
such encounters in the courts of the United Arab Emirates
(the UAE), Malaysia and England.
England: Symphony Gems and Beximco
In England, two Islamic finance cases have come before
the courts. One was heard before the High Court (Islamic
Investment Company of the Gulf (Bahamas) Ltd v Symphony Gems
NV & Ors unreported 2002 WL 346969, [2002] All ER (D)
171 (Feb) (QBD: Comm Ct), available on LexisNexis,
comment in Bälz, K (2004) “A Murabaha Transaction in an
English Court: The London High Court of February 13,
2002 in Islamic Investment Company of the Gulf (Bahamas) Ltd
v Symphony Gems NV & Ors’ (11) Islamic Law and Society 117:
the Symphony Gems case); the other (Shamil Bank of Bahrain
EC v Beximco Pharmaceuticals Ltd [2004] EWCA Civ 19;
[2004] 1 WLR 1784 (CA), at first instance [2003] EWHC
2118; [2003] 2 All ER (Comm) 849, comment in Bälz, K
(2005) “Islamic Financing Transactions in European
Courts” in Ali, SN (ed) Islamic Finance: Current Legal and
Regulatory Issues Islamic Finance Project, Islamic Legal
Studies Program, Harvard Law School, particularly at 6567: the Beximco case), reached the Court of Appeal.
Islamic finance transactions are designed to avoid riba.
Riba can be roughly described as unlawful gain. It is clearly
forbidden by the Koran, but there is no universally agreed
definition. Most jurists agree that interest constitutes riba,
but the popular belief that interest and riba are the same is
wrong, because the ambit of riba is considerably wider than
that of interest. Sale, however, is permitted. In this
connection, a well known verse of the Koran (II: 275) is
often quoted:
They said that sale is like riba whereas Allah has allowed sale
and has banned riba.
Both cases concerned a commonly used type of
contract, the murabaha. Rather than a bank lending money
at interest to a client wishing to purchase goods in return
for the grant of a security interest on those goods, the bank
buys the goods itself, then sells them to the client at a
higher price agreed in advance. For this reason it is also
called the “cost-plus-profit” contract. Unsurprisingly, the
difference in price is the same amount as the client would
have paid in the conventional, riba-based loan transaction.
In both cases the documents were governed by English law.
They differed, though, in the way in which the drafters
attempted to subject the transactions to the sharia.
In Symphony Gems the attempt was contained in a mere
recital, to the effect that: “The Purchaser wishes to deal
with the Seller for the purpose of purchasing Supplies […]
under this Agreement in accordance with the Islamic
Shari’ah.” Presumably as a result of the negligible effect
usually given to recitals, Tomlinson J felt able to brush the
reference to the sharia aside, saying: “it is a contract
governed by English law. I must simply construe it
according to its terms as an English law contract.”
In Beximco, however, the reference to the sharia was
contained in the governing law clause and was therefore
the subject of considerable discussion. It read: “Subject to
the principles of the Glorious Shari’a, this Agreement shall
be governed by and construed in accordance with the laws
of England.” Morison J found at first instance that Article
1.1 Rome Convention (Convention on the Law Applicable
to Contractual Obligations, Rome 1980), enacted into
English law by section 2(1) Contracts (Applicable Law)
Act, 1990, could not be construed so as to permit the
sharia to be the applicable law of a contract, as it is not the
law of a “country” (paras 27 and 35). Reference was also
made to Article 3.1 (“the law chosen by the parties”, rather
flimsy support in this author’s view) and Article 3.3 (much
stronger support, containing references to “foreign law”
and “country”). This finding was not contested on appeal
(paras 43 and 48).
Also, counsel for the appellant conceded at first instance
that it was impossible for two systems of law to govern the
contract (paras 28–30 of Morison J’s judgment, referring
to American Motor Insurance Co v Cellstar Corpn [2003] EWCA
Civ 206, [2003] All ER (D) 26 (Mar) at 32). He
contended, though, that the parties had stipulated “as a
condition precedent that the contract is only to be
enforceable insofar as it is consistent with the principles of
Shari’a, which principles amount to legal rules
ascertainable and applicable by an English Court” (para
42). In other words he claimed that the sharia was
incorporated by reference, something allowed by English
law (para 43, referring to Nea Agrex SA v Baltic Shipping Co
Ltd [1976] 1 QB 933 (CA)), and that the incorporation
was specific enough to be meaningful, because it
incorporated “simply those specific rules of Shari’a which
relate to interest and to the nature of Morabaha and Ijarah
contracts, thus qualifying the choice of English law as the
governing law only to that extent” (para 49, summarising
the appellant’s argument).
However, Potter LJ (who gave the judgment of the court,
Laws and Arden LJJ concurring) based his reasoning
squarely on contractual interpretation, saying: “The central
question in this appeal is one of construction” (para 46).
The English approach to interpretation is, of course, “to
ascertain the presumed intention of the parties” in the
context of “the commercial purpose of the contract[,] the
genesis of the transaction, the background, the context
[and] the market in which the parties are operating” (id,
referring to Lord Wilberforce’s speech in Reardon Smith
Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 996).
He reasoned that, since all the parties knew perfectly well
that the arrangements really amounted to loans, and they
always intended to be bound by the terms of the contracts,
the governing law clause should be construed so as to give
effect to the commercial purpose of the contracts, in other
words, so as to give effect to them as loans.
As for the appellant’s argument on incorporation he
held, in effect, that only a clear reference to “sufficiently
identified specific ‘black letter’ provisions […] such as a
particular article or articles of the French Civil Code or the
Hague Rules” (para 51) could displace the initial
conclusion he had reached, and that the reference to the
sharia was too vague to achieve this result. “The general
reference to principles of Shari’a in this case affords no
reference to, or identification of, those aspects of Shari’a
law which are intended to be incorporated into the
contract, let alone the terms in which they are framed”
(para 52). Being merely “a reference to the body of Shari’a
law generally”, it made the clause “self-contradictory and
therefore meaningless” (ibid), presumably meaning that
this interpretation resulted in the agreements being
governed by two “contradictory” laws, English law and the
sharia, a result which, as seen above, is in any event not
permitted. This was because “the words are intended
simply to reflect the Islamic religious principles according
to which the Bank holds itself out as doing business rather
than a system of law intended to ‘trump’ the application of
English law as the law to be applied in ascertaining the
Amicus Curiae Issue 68 November/December 2006
3
liability of the parties under the terms of the agreement”
(ibid).
The decision has been welcomed by the banking
community and their lawyers, for it tells us that the English
courts will enforce Islamic finance documents governed by
English law in accordance with their terms.
Malaysia: The Affin Bank case
In Affin Bank Berhad v Zulkifli Abdullah ([2006] 1 Current
Law Journal 438, Bernama, December 29, 2005, summary
at http://www.malaysianbar.org.my/content/view/2174/2/
(last visited July 15, 2006): the case is to be the subject of
a study by Dr Ahmad Hidayat Buang), the Commercial
Division of the Kuala Lumpur High Court had to deal with
an “Islamic mortgage” of the form called “Al-Bai Bithaman
Ajil”. In this transaction, the bank buys the property, then
sells it to its customer at a higher price on deferred
payment terms. The aim is to avoid the riba associated with
a “conventional” loan against the security of a mortgage.
The difference between the price paid by the bank and the
price paid by its customer is equivalent to the amount of
interest which would have been payable in a conventional
mortgage
arrangement.
In
this
case
the
purchaser/borrower was an employee of the bank at the
time of the transaction. He left the employ of the bank
shortly afterwards. Some time later he defaulted on the
payments. The sum of the original price paid for the house
and unpaid instalments to the date of the claim was
RM582,000 (c£84,000: RM = Malaysian Ringgit or
Malaysian Dollar; all conversions made on July 15, 2006).
The bank, however, sued for the original price plus all sums
payable by the purchaser/borrower over the 18 year term
of the agreement, a total of almost RM959,000
(c £138,000). The market value of the house was estimated
to be of the order of RM400,000 (c £57,600). Abdul
Wahab Patail J greeted the bank’s claim with a degree of
consternation.
When the gratification of being able to satisfy the pious desire
to avoid financing containing the elements of Riba gives way
to the sorrow of default before the end of tenure of an Al-Bai
Bithaman Ajil facility, the revelation that even after the
security had been auctioned at full market value there remains
still a very substantial sum owing to the bank, comes as a
startling surprise. All the more shocking when it is further
realised that a borrower under a Riba-ridden loan is far better
off ([2006] 1 Current Law Journal at 446).
4
A preliminary issue was whether a reference should be
made to the National Syariah [sharia] Advisory Council, a
body which verifies the Islamic credentials of all new
banking products bearing an “Islamic” label.
Understandably, since the SAC is not a court the judge,
guided by a decision of the Court of Appeal (Bank Kerjasama
Rakvat Malaysia v Emcee Corporation [2003] 1 Current Law
Journal 625, per Abdul Hamid Mohamed JCA), came to the
conclusion that this should not be done, because
Amicus Curiae Issue 68 November/December 2006
“reference of this case to another forum for a decision
would be an indefensible abdication by this court of its
function and duty to apply established principles to the
question before it. It is not a question of Syariah [sharia]
law” ([2006] 1 Current Law Journal at 448). He then
examined the relatively sparse previous case-law, and
decided that previous decisions had not considered the
main point, whether “the provider of an Al-Bai Bithaman
Ajil facility is entitled to the profit margin for the whole
original tenure when the facility is terminated before the
end of its tenure” ([2006] 1 Current Law Journal at 448),
and he was therefore not bound by precedent in this
matter.
In a chain of reasoning which is intriguing to compare
with that of the English Court of Appeal in Beximco, Patail
J, following the approach of the Supreme Court in Malayan
Banking Bhd v PK Ralamani ([1994] 2 Current Law Journal 25
(SC), cited at [2006] 1 Current Law Journal 448), looked
beyond the words in the document to the substance of the
transaction and to its economic effect and justification.
Perhaps with the common law principle of the equity of
redemption consciously or unconsciously in his mind (ie a
grantor of security is entitled to the balance remaining
from realisation of the secured asset after satisfaction of the
debt), he pointed out that the bank’s profit was not to be
made by means of the simple difference between the
purchase price and the sale price, but arose from the longterm nature of the transaction, being “a function of the
bank purchase price, the agreed profit rate […] and the
agreed tenure of the facility [and] paid by monthly
instalments according to the number of months in the
tenure of the facility.”
In other words, the customer and the bank had agreed
that the customer would enjoy the benefit of the
arrangement for the duration of the facility and would pay
the bank its profit for that period. So “it would be
inconsistent with his right to the full tenure if he could be
denied the tenure and yet be required to pay the bank’s
profit margin for the full tenure” (id at 450). In addition,
the bank would be able to make a profit on sums recovered
from the customer for the remainder of the tenure,
earning profit twice on the same money. Somewhat
curiously, given that the High Court is a secular forum, and
his statement that the issue was “not a matter of Syariah
[sharia] law” (id at 448), he claimed that the fact that this
would be unearned profit “contradicts the principle of AlBai Bithaman Ajil as to the profit margin that the provider
is entitled to”. He also said that: “if the profit has not been
earned it is not profit, and cannot be claimed under the
[…] facility” (ibid).
The judge therefore reduced the amount of the claim to
RM582,000, the price plus unpaid instalments.
The UAE: assignments in the Federal Supreme
Court
In 2001 the UAE Federal Supreme Court in Abu Dhabi,
although normally regarded as more conservative than its
counterpart in Dubai (the UAE is a federal state but Dubai
has its own court system, supervised by a separate Supreme
Court), sanctioned as legally valid a Western (French) style
transfer of rights with notice to, rather the consent of, the
debtor. (Federal Supreme Court No 693/21 (2001),
English text and comment in Al Ulama, AW (2002)
“Supreme Court Judgment No 693 for the Year 21
Delivered on 18/11/2001” (139) Law Update 12, available
at http://www.tamimi.com/catalog/1998_2004/issue139
October2002.pdf (last visited July 11, 2006); further
comment in Foster, NHD (2004) “An Unstoppable Force
Meets a Movable Object? Assignment of Rights in the
UAE”, (19) Arab Law Quarterly 169.)
The situation regarding transfers of rights in the sharia is
complex, but very briefly Western-style transfers were not
generally permitted, and although it is difficult to tell for
certain, it seems that the drafters of the UAE Civil Code
(Civil Transactions Law of the United Arab Emirates,
enacted by Federal Law No 5 of 1985, as amended by Law
No 1 of 1987), unlike their counterparts in Egypt and
Kuwait, intentionally omitted to include a provision
allowing them. All they inserted was an equivalent to the
sharia rules providing for the transfer of rights in very
limited circumstances (Arts 1106ff).
The most likely explanation of the ruling, in which clear
provisions regarding the Islamic nature of UAE law and
legal reasoning, such as Article 1 Civil Code (recourse to
the sharia in the case of a lacuna), Article 2
(interpretation), Article 3 (public policy) and Article 96
(certainty), were ignored, seems to be the European
mindset of the judges. But one must add that the obscure
nature of the part of the sharia concerned did not provide
a serious obstacle to that mindset.
SOME QUESTIONS AND SOME ATTEMPTS
AT ANSWERS
To sum up. One court in a Muslim-majority jurisdiction
has sanctioned the introduction of a Western-style transfer
of rights, probably as a result of the Western mindset of the
judges. Another court in a Muslim-majority jurisdiction
has refused to give effect to an Islamic transaction because,
in the opinion of a judge who might well have been
influenced by the common law idea of the equity of
redemption, it produced an unjust result. Two courts in a
Western jurisdiction have refused to give effect to words
purporting to make contracts subject to sharia principles.
At least two questions come to mind.
Suitability for the modern commercial world
First question: is the sharia unsuitable for the modern
commercial world?
Take the alleged “controversy and difficulty arising […]
from the need to translate into propositions of modern law
texts which centuries ago were set out as religious and
moral codes” (para 55 of Potter LJ’s judgment in Beximco).
In other words, the sharia is religion, not law. With the
greatest respect to the Court of Appeal, this is a misreading
of the situation. Although, as seen above, the sharia is
certainly tied to religion in a way which is quite different
from Western regimes, and covers all sorts of areas which
Western law does not, the “translation into propositions of
law” was done by the jurists many centuries ago. The rules
of mu’amalat (relating to criminal, family and commercial
matters), although religiously inspired, were clearly and
recognisably legal in the Western meaning of that word.
Despite some uncertainty and academic controversy,
thanks to such studies as that of Professor Nelly Hanna on
the legal records relating to the daily use of the law and the
courts by a successful merchant, we know that the sharia
did, on the whole, provide very practical, workable rules
(Hanna, N (1998) Making Big Money in 1600: The Life and
Times of Isma’il Abu Taqiyya, Egyptian Merchant Syracuse
University Press, p 59 and passim).
The adaptation to modern conditions is another matter.
It must be acknowledged that the process presents
difficulties. One is that the sharia rules were designed for a
very different economic and technological environment.
Another is that there is no agreed method for determining
the content of the law, a difficulty which is exacerbated by
the modern wish to create uniformity, in contrast to the
diversity of legal thought of the past contained in the legal
schools and the internal variation of opinion within them.
The Affin Bank case highlights the further problem that, in
at least one instance, an adaptation of a mechanism from
the classical era has turned out to be unjust in certain
circumstances. Finally, the UAE assignment case seems to
show that, in at least one instance, the sharia is out of step
with “modern” (ie Western) conceptions.
As regards adaptation, much progress has been and
continues to be made in devising products which are
generally if not universally regarded as Islamic and which
function well in contemporary markets.
Regarding uncertainty, it is true that it is greater than
that experienced in a secular, state-based regime such as
English law. The mechanisms of the classical period, which
might have been used for adapting the sharia to modern
life, are no more, whereas English law has a legislature and
a system of courts, one of the functions of which is to
develop, and maintain a degree of certainty in, the content
of the law. However, the difficulties are not insuperable
here either. As in other fields, there is in Islamic finance “a
process of reconstruction of shari’a” (Arabi, O (2001)
Studies in Modern Islamic Law and Jurisprudence, Kluwer Law
International, p 200), based on the deduction of principles
from the literature of various schools, which is resulting
inter alia in an increase in certainty. Various projects (which
are still admittedly in their early stages) have been
Amicus Curiae Issue 68 November/December 2006
5
undertaken, including the setting up of the Islamic
Financial Services Board (standardisation of products), the
International Islamic Rating Agency (assessment and
grading of the management of agencies), the Accounting
and Auditing Organisation for Islamic Financial
Institutions (production of numerous standards on
accounting and auditing, governance and sharia
observance) and the International Islamic Financial Market
(includes standardisation and consistency).
Longer-standing institutions include the Institute of
Islamic Research (Majma’ Al-Buhuth Al-Islamiyyah of AlAzhar University in Cairo (set up in 1961), the Islamic
Jurisprudence Institute (Al-Majma’ Al-Fiqhi Al-Islami) of the
Islamic League (Rabita Al-‘Alam Al-Islami) (set up in 1979),
the Fiqh Institute or Academy (Majma’ Al-Fiqh Al-Islami)
of the Organization of Islamic Conference (OIC:
Munazammat Al-Mu’tamar Al-Islami), operating in Jedda,
Saudi Arabia (set up in 1984); according to Professor ElGamal, the last mentioned “is currently the most widely
cited jurisprudential council, which is comprised of
representatives from Islamic members of the OIC” (ElGamal, MA (2003) “ ‘Interest’ and the Paradox of
Contemporary Islamic Law and Finance”, (27) Fordham
International Law Journal 108, 114; the list in this sentence
comes from pp 113–114 of Professor El-Gamal’s article).
In addition, the number of Islamic scholars is small,
resulting in a high level of uniformity; there is a significant
amount of standardised best practice; and the documents
are more standardised than in the past. One author does
argue that, since each financial institution regards its
products as valuable property the details of which it tries to
keep secret, there is “little standardization and information
sharing” (Smith, K (2005) “Islamic Banking and the
Politics of International Financial Harmonization” in Ali
SN (ed) Islamic Finance: Current Legal and Regulatory Issues
Islamic Finance Project, Harvard Law School, p 185).
However, such secrecy cannot be sustained for ever, as the
law firms which draft the documents own the copyright in
them and cannot be prevented from using them for other
clients, and knowledge of the documents will inevitably
circulate to some extent.
The overall result, according to a leading practitioner, is
that Islamic finance scholars agree on the vast majority of
issues. Problems are, naturally, still identified, but deals no
longer collapse in the way they once did (Neil Miller of
Norton Rose in a conversation on May 2, 2006).
6
On the question of the unfairness produced by the
documentation in the Affin Bank case, the “Islamic”
mechanism concerned would indeed have produced a
result which seems unjust had the court not intervened.
However, this does not prove that the sharia cannot be
adapted to the modern world, just that this particular
transaction type needs amending. It is hardly fatal to
Islamic finance that a problem arises which needs
resolution in order to ensure that a mechanism produces a
Amicus Curiae Issue 68 November/December 2006
fair result as well as being formally in compliance with the
rules devised by the jurists of many centuries ago. All legal
systems face similar problems. Mechanisms are devised;
unexpected, and sometimes unfair, consequences result.
All this means is that the law needs adjustment. In a similar
context, English law only managed to devise the equity of
redemption and the doctrine of undue influence several
centuries after the invention of the mortgage. One might
go further and point out that approval of a mechanism in
the context of Islamic finance does not necessarily mean
that that mechanism is absolutely and completely Islamic,
although the author stresses that, as a non-Muslim, he is
not qualified to hold an opinion on the Islamicity of a
transaction type.
The situation which was evidenced by the UAE
assignments case may be the only one which constitutes a
truly unsquarable circle. It does seem on the surface that
the sharia rule runs counter to the modern trend, that
“each society in which commerce plays a role sooner or
later has to face a strong demand to increase the circulation
of credit” (Zimmermann, R (1990) The Law of Obligations:
Roman Foundations of the Civilian Tradition Kluwer Law
International, p 59). Even here, though, other
considerations must be taken into account. For example,
the schools differed markedly in this area, so that one can
justifiably say that hawala (the sharia term for transfers of
rights/obligations, often translated as “assignment”,
although such a translation is highly misleading) is no more
than a name for various mechanisms which developed so
differently that all they share is the name and their roots in
the idea of transfer. (On the variations, see Ray, N D
(1997) “The Medieval Islamic System of Credit and
Banking: Legal and Historical Considerations”, (12) Arab
Law Quarterly 43, pp 60–65.) One also needs to bear in
mind that custom (‘urf) and legal stratagems (hiyal) played
a prominent part in commercial law in the classical age, so
the impression given by a study of basic principle is
deceptive. We know that in Hanafi law, for example, the
ban was circumvented (id pp 61–62). The conclusion may
therefore be that there was no “sharia rule” in this area,
that in the reformulation process one can select certain
parts of the sharia, and that parts exist which lend
themselves to adaptations for the modern environment.
A conflict between Western legal thinking and the
sharia?
Second question: is a Western court, or one influenced
by Western legal thinking, inappropriate for the
enforcement of the sharia? If so, are these cases instances
of secular, Western-style courts dominating and
overturning it? This is a particularly sensitive issue as a
result of some (to Islamic law scholars) notorious
statements in early oil-related arbitrations. “[I]t would be
fanciful to suggest that in this very primitive region there is
any settled body of legal principles applicable to the
construction of modern commercial instruments.” (Lord
Asquith in Sheikh of Abu Dhabi v Petroleum Development (Trucial
Coast) Ltd 18 ILR 144 at 149, [1951] ICLQ 247 at 251.)
“I need not set out the evidence before me about the
origin, history, and development of Islamic Law as applied
in Qatar or as the legal procedure in that country. I have no
reason to suppose that Islamic Law is not administered
there strictly, but I am satisfied that the law does not
contain any principles which would be sufficient to
interpret this particular contract.” (Sir Alfred Bucknill in
Ruler of Qatar v International Marine Oil Co (1953) 20 ILR
534 at 545.) “Saudi law must be interpreted or
supplemented by the general principles of law, by the
custom and practice in the oil business, and by notions of
pure jurisprudence.” (Saudi Arabia v Aramco 27 (1963) ILR
117.)
In the UAE assignments case, the issues of adaptation
and conflict are linked. If it was true that the court was
confronted with a truly unsquarable circle, the square
being the secular law which reflects the perceived needs of
modern commerce, the circle being the sharia, one might
argue that the choice of secular law was determined by the
Western influenced mentality of the Egyptian judges, for
the Egyptian position in this area is based on French law
and contains a provision for the transfer of a right (Arts
303 and 315 Egyptian Civil Code), and that this choice
demonstrates that, even in an islamicising Muslim-majority
jurisdiction such as the UAE, Western legal mentality is so
dominant that the true sharia cannot survive.
However, if, following the suggestion put forward above,
we accept that there was no such thing as “the classical
hawala”, but numerous hawalas, and that, among the
Hanafis at least, rights were transferable, we can argue that
the result of the case was not out of line with at least some
of the classical law as practiced (raising, incidentally, the
difficult question of whether modern law based on the
sharia should reflect custom and stratagems, or whether it
should be “cleansed” of such elements). The principle of
takhayyur, or choice of one school’s solution for the needs
of the modern world, can then be applied to make it “the”
modern sharia rule. (This reasoning would justify modern
scholars’ lack of concern in this area; they assume that such
transfers are possible and concentrate on the issue of riba,
see, eg, M Aslam Khaki v Syed Muhammad Hashim PLD 2000
SC 225 at 317 (Order of the Court).) In addition, one
needs to bear in mind that the subject is so obscure that it
might be said that it is not of particular cultural importance
(Foster, “An Unstoppable Force”, p 188).
In the Affin Bank case the issues of adaptation and
conflict are also linked, for the adaptation produces a
conflict with secular law ideas. A judge whose mentality is
influenced by Western law refuses to enforce a contract of
a type approved by sharia scholars. It is submitted,
however, that here too the conflict is more apparent than
real, and that, following the argument in the previous
section on this case, the better view is that the judge was
doing no more than exercising his sense of fairness, that he
was quite right to do so, and that the true problem is the
perfectly natural and inevitable one of adjustment. It is also
submitted that there is an assumption underlying the
“conflict” view, ie that a contract type approved by Islamic
scholars must be perfect. This assumption is of course
mistaken, as no drafter or reviewer of any legal mechanism
can foresee all the consequences which may result from the
use of that mechanism.
Beximco is perhaps the trickiest of the cases in this regard.
We have already seen that it has been welcomed in the
international financial community. Banks can get their
money back (so long, of course, as they can enforce the
judgment, but that is another story). However, one might
argue that the sharia nature of the contract was ignored by
the Court of Appeal. One might also argue that it was
“anti-sharia” in the sense that it gave too much weight to
the submissions concerning the uncertainty of the sharia
because, as discussed previously, there is a considerable
degree of consensus in Islamic finance, and that it was
therefore wrong not to have accepted the incorporation
argument. Here we enter a difficult area. The defendants’
position was extremely weak, because it was clear that the
Islamic nature of the transaction was irrelevant to them.
This was explicitly mentioned in the judgment:
it is not uncommon for banks, in their enthusiasm to make
profitable loans, to use a Morabaha Agreement to disguise
what is, as a matter of commercial reality, an interest-bearing
loan. That is precisely what happened in the present case and
both the Claimant and the Defendants were quite content
that this should happen. Neither was under any illusion as to
the commercial realities of the transactions, and the claimant
was happy to dress the loan transactions up as Morabaha
sales (or Ijarah leases), whilst taking no interest in whether
the proper formalities of such a sale or lease were actually
complied with. (para 28.)
Therefore their attempt to escape liability by claiming
that its Islamicity was essential was viewed in a dim light.
In addition, the hearing and the appeal therefrom
concerned an application for a default judgment, which
meant that the case proceeded on the basis of certain
assumptions which would have been contested had the
issues gone to a full trial.
As for the future, the agreed interpretation of the Rome
Convention to the effect that its wording excluded the
sharia as a governing law, requiring counsel for the
defendants to argue that it should be incorporated by
reference, meant that the issue of certainty was decisive as
to whether the sharia could be applied. However, the
relevant text is being revised as part of its transformation
into an EU Regulation, and the draft wording
contemplates the application of a non-state law, so long as
it is precise enough:
To further boost the impact of the parties’ will, a key principle
of the Convention, [draft Article 3] paragraph 2 authorises
the parties to choose as the applicable law a non-State body
Amicus Curiae Issue 68 November/December 2006
7
of law. The form of words used would authorise the choice of
the UNIDROIT principles, the Principles of European
Contract Law or a possible future optional Community
instrument, while excluding the lex mercatoria, which is not
precise enough, or private codifications not adequately
recognised by the international community. Like Article 7(2)
of the Vienna Convention on the international sale of goods,
the text shows what action should be taken when certain
aspects of the law of contract are not expressly settled by the
relevant body of non-State law”. (Commission of the
European Communities (2005) “Proposal for a Regulation of
the European Parliament and the Council on the Law
Applicable to Contractual Obligations (Rome I) COM(2005)
650 final, p 5.)
Draft Article 3, paragraph 2 reads:
The parties may also choose as the applicable law the
principles and rules of the substantive law of contract
recognised internationally or in the Community.
However, questions relating to matters governed by such
principles or rules which are not expressly settled by them shall
be governed by the general principles underlying them or,
failing such principles, in accordance with the law applicable
in the absence of a choice under this Regulation.
In other words, if the same issue had to be decided on
the basis of the new draft wording, it would be arguable
that the sharia is applicable, but the issues of certainty and
the impossibility of applying two laws would remain.
Perhaps more importantly, the governing law clause in
question was an attempt to produce demonstrably Islamic
transactions during an early stage of the development of
Islamic finance law, an attempt which naturally explored
only one of various available possibilities. Others which
could be investigated include the designation of a national
law such as that of Saudi Arabia, and the use of English law
combined with the incorporation by reference of a
specified sharia regime, whether national or determined by
reference to standards such as those of the organisations
already mentioned.
8
In addition, a choice of Islamic Law may well be
recognised before an arbitral tribunal. According to one
author: “A choice-of-law clause in favour of ‘Islamic law’
[…] is valid and workable, as long as the dispute is
submitted to arbitration” (Bälz, K (2001) “Islamic Law as
Governing Law under the Rome Convention. Universalist
Lex Mercatoria v Regional Unification of Law” (NS 6)
Uniform Law Review 37, p 44, citing Art 28(1) UNCITRAL
Model Law). As regards arbitration in England, section
46(1)(b) Arbitration Act 1996 seems to allow the
recognition of Islamic law: “The arbitral tribunal shall
decide the dispute […] if the parties so agree, in
accordance with such other considerations as are agreed by
them”). However, arbitration is not well suited to financial
disputes, as it can take much longer to reach a conclusion
than litigation in the English courts, can be more
Amicus Curiae Issue 68 November/December 2006
expensive, and does not benefit from the same range of
remedies.
An approach adopted by one leading law firm is of
considerable interest. The Islamicity of the contract is
treated as a matter of compliance, rather than substantive
law. In their documentation, which is of course approved
by sharia scholars, the recitals state that the sharia is to be
observed, and the bank’s customer makes a representation
that the customer is satisfied that the contract is Islamic
(information from Neil Miller of Norton Rose in a
conversation on May 2, 2006). This method ensures that
the documentation meets sharia requirements by taking
advantage of the English law principle of freedom of
contract, which allows the construction of Islamically valid
transaction structures and provides access to the
advantages of the English court system, giving financial
institutions effective and reasonably quick remedies. At the
same time, it creates a situation in which it would be
difficult for the customer to argue before an English court
that sharia issues should be considered by the court, thus
avoiding the sort of difficulties experienced by the Court of
Appeal in Beximco, caused by their understandable
unfamiliarity with Islamic finance law. Whether the
approach achieves an Islamically proper result is difficult to
say, as this depends on one’s definition of “Islamically
proper”, but it does provide an interesting example of an
attempt to respect sharia requirements while at the same
time making litigation before a secular court as simple as
possible.
The existence of this range of possibilities shows that,
despite the Court of Appeal’s possibly mistaken view of
sharia certainty, English law is flexible enough to produce
several possibilities for accommodation between the two
systems.
CONCLUSION
It is submitted, therefore, that the answers to the
question posed at the beginning of the previous subsections are: No and No.
No: the sharia is not inherently unsuitable for the
modern commercial world, even if the process of
adaptation is not yet complete.
No: with the possible exception of the UAE assignment
case, the decisions discussed herein do not constitute
instances of secular, Western-style courts dominating and
overturning the sharia. There is no inherent or insoluble
dichotomy between the sharia as it concerns financial
transactions and Western-based legal systems.
However, this is not the end of the story.
On the adaptation point, if it is correct that the
adaptation process is more difficult than initially realised,
controversy and vigorous debate will no doubt result for,
unlike Western law, issues relating to the sharia, an integral
part of the Muslim religion, arouse strong emotions. For
example, the submission made above that Al-Bai Bithaman
Ajil may not automatically be Islamic as a result of its
approval by sharia scholars is controversial and emotive,
surprising as this may seem to a Western-trained lawyer.
On the conflict point, if a secular, say, English, court did
find itself in the position of having to enforce the sharia,
whether as the governing law of the contract (if this is
made possible by the revised Rome Convention), or as a set
of rules incorporated by reference, various issues would
arise.
Would it be viewed as desirable that a Western-trained
judge decide a case with no knowledge of the sharia other
than that given to her by expert witnesses? The point was
made by Morison J in Beximco: “The English court, as a
secular court, is not suited to ascertain and determine
highly controversial principles of a religious-based law and
it is unlikely that the parties would be satisfied by any such
ruling; that is not what they were wanting by their choice
of law clause” (para 36). He also stated that, if the sharia
were effectively incorporated into the agreements, the
court would be obliged to: “determine [a] dispute as to the
nature or application of […] controversial religious
principles which would involve it in the task of deciding
between opposing points of view which themselves might
be based on geopolitical and particular religious beliefs”
(paras 49–54, cited in para 40 of Potter LJ’s judgment).
(However, one should also recall the difference between
those parts of the sharia relating to ritual and general
behaviour (ibada and akhlaq) and that part relating to
transactions (mu’amalat).)
Would such a situation result in the creation of an
“English law financial sharia”, along the lines of the much
criticised Anglo-Muhammadan law of British Empire days?
For example, if a secular court were to find, concerning
facts similar to those of Beximco, that the agreement did not
comply with the sharia, it would have to determine the
effect of the resulting invalidity. In so doing, it would
effectively create a form of persuasive precedent on the
point (it could not formally have this effect, of course,
since the decisions of an English court cannot affect nonEnglish law). Would this be viewed as desirable? The
considerations arising in a jurisdiction such as Malaysia are,
of course, significantly different, as are the possible
solutions, but nonetheless raise questions in the same sort
of general area.
We can see, therefore, that although the apparent
problems of adaptation and conflict are actually not
anywhere near as serious as they might appear at first
glance, the relationship between the sharia and secular law
is far from settled, and will be one of the most interesting
and significant topics for legal studies over the course of
the next few decades.
Some further reading
Companion studies: Foster, NHD (Forthcoming)
“Islamic Finance as an Emergent Legal System” Arab Law
Quarterly (some of the material herein is shared with the
material in that piece; for the sake of brevity, this is the only
acknowledgement of that fact); Foster “An Unstoppable
Force”.
Islamic finance: Vogel, F E and Hayes, S L (1998) Islamic
Law and Finance: Religion, Risk and Return, Kluwer Law
International.
The “restoration” of the shari’a: Hallaq, WB (2004)
“Can the Sharia Be Restored?” in Haddad, YY and
Stowasser, BF (eds) Islamic Law and the Challenges of
Modernity AltaMira Press.
Islamic finance regulatory bodies: Henry, CM (2005)
“Introduction” in Ali SN (ed) Islamic Finance: Current Legal
and Regulatory Issues Islamic Finance Project, Islamic Legal
Studies Program, Harvard Law School at 4-5; Smith
“Islamic Banking and the Politics of International Financial
Harmonization”, pp 172–77 (on the genesis of AAOFI)
and pp 184–85 (on the IIFM and the LMC).
Nicholas H D Foster
School of Law, School of Oriental and African Studies, University of
London. The author gratefully acknowledges the generosity of Antony
Dutton and Neil Miller of Norton Rose in sparing him a morning of their
valuable time, as well as Ian Edge’s helpful comments on an earlier draft.
All opinions and mistakes, both of commission and commission, are of
course the author’s own. Transliteration of Arabic words has been
simplified for ease of reading and is therefore not necessarily consistent.
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